Setting up your business as a corporation or limited liability company (LLC) is a crucial way to protect your personal assets from debts and other liabilities incurred by your business. The ability of a corporate entity, such as an S Corp or LLC, to separate and safeguard your personal assets is often referred to as creating a “corporate veil.”
To ensure your personal assets are safeguarded from liabilities incurred by your company, here are three key ways to help keep your corporate veil intact.
1. Observe corporate formalities
One of the most important ways to keep your veil intact is to strictly adhere to all formalities your corporate entity is required to follow. Whether this is filing an annual report, adopting corporate bylaws, or keeping detailed records (minutes) of meetings where major business decisions are made, it’s vital that you’re aware of and abide by these obligations.
If these formalities aren’t properly observed, a court can remove the corporate veil, leaving your personal assets vulnerable to business creditors.
2. Keep your personal and business assets separate
Keep your personal and business finances totally separate at all times. If you don’t, a court can claim your business entity is nothing but a shell and remove the corporate protection shielding your personal assets.
Maintain separate bank accounts for your company and your personal finances and never use corporate funds to pay for personal expenses. Avoid commingling your own finances with those of your company at all costs.
3. Consider wisely whether to cosign a business loan or use personal assets as collateral
If you cosign on a business loan or personally guarantee a financial obligation for your corporate entity, you share responsibility with the company for paying it back. If you default on the loan, business creditors can come after your personal assets to settle the debt.
Similarly, when taking out a business loan, if you put up any personal assets like your home as collateral, the property you use can be seized and sold to pay off your business creditors.
Keep the veil intact
With all of the different rules and requirements surrounding corporations and LLCs, be diligent about ensuring you’re not opening yourself up to be personally liable for your business debts. We’ll advise you about the business entity that’s most suitable for your circumstances and help you properly create and maintain your corporate structure. Contact us today to learn more.
AB Law, PLLC is a full-service business law and estate planning firm that serves clients throughout Texas. All consultations are free and no question is too silly, ridiculous, or complex. https://calendly.com/ablawpllc www.ab-firm.com